A drawback of short-term contracting as an alternative to making a component in-house is that
A) it is the most-integrated alternative to performing an activity so the principal company has no control over the agent.
B) the supplying firm has no incentive to make any transaction-specific investments to increase performance or quality.
C) it fails to allow a long planning period that individual market transactions provide.
D) the buying firm cannot demand lower prices due to the lack of a competitive bidding process.

Question

Quizplus · Accepted Answer

The drawback of short-term contracts is that firms responding to the requests for proposals (RFPs) have no incentive to make any transaction-specific investments (e.g., buy new machinery to improve product quality) due to the short duration of the contract.

A Drawback of Short-Term Contracting as an Alternative to Making